Question

Tami Tyler opened Tami’s Creations, Inc., a small manufacturing company, at the beginning of the year. Getting the company through its first quarter of operations placed a considerable strain on Ms. Tyler’s personal finances. The following income statement for the first quarter was prepared by a friend who has just completed a course in managerial accounting at State University.

Tami’s Creations, Inc. Income Statement For the Quarter Ended March 31
Sales (24,000 units)				$	871,200
Variable expenses:
Variable cost of goods sold	$	292,800
Variable selling and administrative		190,800			483,600
Contribution margin					387,600
Fixed expenses:
Fixed manufacturing overhead		229,500
Fixed selling and administrative		220,000			449,500
Net operating loss				$	( 61,900)

Ms. Tyler is discouraged over the loss shown for the quarter, particularly because she had planned to use the statement as support for a bank loan. Another friend, a CPA, insists that the company should be using absorption costing rather than variable costing and argues that if absorption costing had been used the company probably would have reported at least some profit for the quarter.

At this point, Ms. Tyler is manufacturing only one product—a swimsuit. Production and cost data relating to the swimsuit for the first quarter follow:

Units produced	27,000
Units sold	24,000
Variable costs per unit:
Direct materials		$	7.30
Direct labor		$	3.00
Variable manufacturing overhead		$	1.90
Variable selling and administrative		$	7.95

Required:

1. Complete the following:

a. Compute the unit product cost under absorption costing.

b. What is the company’s absorption costing net operating income (loss) for the quarter?

c. Reconcile the variable and absorption costing net operating income (loss) figures.

3. During the second quarter of operations, the company again produced 27,000 units but sold 30,000 units. (Assume no change in total fixed costs.)

a. What is the company’s variable costing net operating income (loss) for the second quarter?

b. What is the company’s absorption costing net operating income (loss) for the second quarter?

c. Reconcile the variable costing and absorption costing net operating incomes for the second quarter.

Answer 1

Construct The Absorption Costing Unit Product Cost
				Q-1
Direct Material				7.30
Direct labour				3.00
Variable Manufacturing overheads				1.90
Fixed Manufacturing overheads				8.50
Absorption costing unit prroduct cost				20.70
Construct the Absorption Costing Income Statement
				Q-1
Sales				$871,200
Cost of Goods sold				496800
Gross Margin				$374,400
Selling and distribution expense				410,800
Net operating income				-36,400
Reconciliation:
Net loss as per variable costing						-61900
Add: Fixed expense deferred in Ending inventory (3000*8.50)						25500
Net loss under absorption costing						-36400
Compute the Variable costing Unit Product cost
				Q-2
Direct Material				7.30
Direct labour				3.00
Variable Manufacturing overheads				1.90
Variable costing unit prroduct cost				12.20
Construct The Variable Costing Income Statement
				Q-2
Sales					1,089,000
Less: Variable cost
variable cost of goods sold				366,000
Variable selling expense				238,500	604,500
Contribution margin					484,500
Fixed expense:
Fixed Manufacturing overheads					229,500
Fixed selling expense					220,000
Net operating Income					35,000
Construct the Absorption Costing Income Statement
				Q-2
Sales				$1,089,000
Cost of Goods sold				621000
Gross Margin				$468,000
Selling and distribution expense				458,500
Net operating income				9,500
Reconiliation:
Net Income as per Vvariable costing					35000
Less: Fixed Cost released in Beginning Inventory					-25500
Net Income under Absorptionn costing					9500